UNITED STATES DISTRICT COURT
DISTRICT OF NEW SEARCHLAND
JENNY JESSEN, On Behalf of Herself and All
Others Similarly Situated,
)
)
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Plaintiff,
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vs.
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SMOKIN’ CIGARETTES, INC., and JESSE
)
WINSTON,
)
)
Defendants.
)
)
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)
)
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Civ. No.
CLASS ACTION
COMPLAINT FOR VIOLATION OF
THE FEDERAL SECURITIES LAWS
DEMAND FOR JURY TRIAL
Plaintiff, Jenny Jessen, individually and on behalf of all other persons and entities
similarly situated, by her undersigned attorneys, for her complaint against the above-captioned
defendants, alleges upon personal knowledge as to herself and her own acts, and upon
information and belief as to all other matters, based upon, inter alia, the investigation made by
and through her attorneys, which investigation included, among other things, a review of the
public documents, Securities and Exchange Commission (“SEC”) filings, analyst reports, news
releases and media reports concerning Smokin’ Cigarettes, Inc. (“Smokin’” or the “Company”),
as follows:
NATURE OF THE ACTION
1.
This is a federal securities class action on behalf of all persons and entities, other
than defendants, who purchased or otherwise acquired the securities of Smokin’ between January
1, 1995 and June 27, 1996, inclusive, seeking to pursue remedies under the Securities Exchange
Act of 1934 (the “Exchange Act”).
JURISDICTION AND VENUE
2.
The claims alleged herein arise under Sections 10(b) and 20(a) of the Exchange
Act, 15 U.S.C. §§ 78j(b) and 78t, and Rule 10b-5, 17 C.F.R. § 240.10b-5 promulgated
thereunder.
3.
The jurisdiction of this Court is based on Section 27 of the Exchange Act, 15
U.S.C. § 78aa and 28 U.S.C. § 1331 (federal question jurisdiction).
4.
Venue is proper in this judicial district pursuant to Section 27 of the Exchange
Act. Many of the acts and transactions giving rise to the violations of law complained of herein,
including the preparation and dissemination to the investing public of materially false and
misleading information, occurred in this judicial district. The Company is incorporated and
maintains its principal place of business in New Searchland.
5.
In connection with the acts, conduct and other wrongs alleged in this complaint,
defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including but not limited to, the United States mails, interstate telephone communications and
the facilities of the national securities exchange.
PARTIES
6.
Plaintiff, Jenny Jessen, purchased Smokin’ common stock during the Class
Period, as set forth in the certification attached hereto and incorporated herein by reference, and
was damaged thereby. Plaintiff is a citizen of New Searchland.
7.
Defendant Smokin’ is a New Searchland corporation and maintains its principal
executive offices in New Searchland. Smokin’ is a major manufacturer of tobacco products,
including cigarettes.
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8.
Defendant Jesse Winston (“Winston”) was Chairman and Chief Executive Officer
(“CEO”) of the Company at all relevant times. Winston participated in making the false and
misleading statements referred to herein.
9.
During the Class Period, Defendant Winston was privy to non-public information
concerning the Company’s finances, markets and present and future business prospects via
access to internal corporate documents, conversations and connections with other corporate
officers and employees, and information provided to him in connection therewith. Because of
his possession of such information, Defendant Winston knew or recklessly disregarded the fact
that adverse facts specified herein had not been disclosed to, and were being concealed from, the
investing public. Defendant Winston, by virtue of his high-level position with the Company,
directly participated in the management of the Company, was directly involved in the day-to-day
operations of the Company at the highest levels, and was privy to confidential proprietary
information concerning the Company and its business, operations, growth, financial statements,
and financial condition, as alleged herein. Defendant Winston was involved in drafting,
producing, reviewing and disseminating the false and misleading statements and information
alleged herein. Defendant Winston was aware, or recklessly disregarded, that the statements
made concerning the Company during the Class Period were false and misleading, in violation of
the federal securities laws.
10.
As an officer and controlling person of a publicly held Company whose securities
were and are registered with the SEC pursuant to the Exchange Act, and are traded on the New
Smokeland Stock Exchange (“NSSE”) and governed by the provisions of the federal securities
laws, Defendant Winston had a duty to disseminate accurate and truthful information promptly
with respect to the Company’s financial condition and performance, growth, operations, financial
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statements, business, markets, management, earnings and present and future business prospects,
and to correct any previously issued statements that had become materially misleading or untrue,
so that the market price of the Company’s publicly traded securities would be based upon
truthful and accurate information. Defendant Winston’s misrepresentations and omissions
during the Class Period violated these specific requirements and obligations.
11.
Both of the defendants are liable as participants in a fraudulent scheme and course
of business that operated as a fraud or deceit on purchasers of Smokin’ securities by
disseminating materially false and misleading statements and/or concealing material adverse
facts. The scheme (i) deceived the investing public regarding the Company’s business,
operations, management and the intrinsic value of the Company’s securities; and (ii) caused
Plaintiff and other members of the Class to purchase the Company’s securities at artificially
inflated prices.
SUBSTANTIVE ALLEGATIONS
Contingent Sales
12.
On April 15, 1995, the Company announced record sales for the quarter ended
March 31, 1995 (“1Q95”). In the press release issued that day, Defendant Winston credited the
Company’s “We’re Smokin!” advertising campaign for driving demand. Defendant Winston
noted that “[w]e have successfully reinvigorated our marketing efforts. The ‘We’re Smokin!’
campaign is truly a breath of fresh air, helping us to connect with the hard working men and
women who deserve a great cigarette at a fair price.”
13.
Similar press releases, announcing continuing strong growth were issued on July
14, 1995, October 16, 1995, and January 13, 1996, for the quarters ended June 30, 1995
(“2Q95”), September 30, 1995 (“3Q95”), and December 31, 1995 (“4Q95”), respectively. The
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January 13, 1996 press release also announced preliminary results for the year ended December
31, 1995 (“FY95”). All of the press releases attributed the strong sales to increasing demand for
the Company’s products.
14.
On April 16, 1996, the Company issued a press release reporting strong sales and
increased demand for its products, resulting in record sales for the quarter ended March 31, 1996.
Indeed, the Company noted that sales had increased 23% from the same quarter a year ago.
Defendant Winston again credited the “We’re Smokin!” campaign for the record quarterly
revenue results, noting that “[w]e have struck a chord with the hard working men and women of
America. Providing a great quality cigarette at a fair price has shown them how much we care.”
15.
On July 14, 1996, the Company again announced record quarterly revenue results,
which increased 27% from the same quarter a year ago. Defendant Winston attributed the record
results to the impressive, continuing demand growth.”
16.
Unbeknownst to shareholders at the time of the above announcements, defendants
had failed to disclose the following facts which they knew at the time, or should have known:
(a)
Beginning on January 1, 1995, the company had improperly recorded as
sales, shipments of cigarettes that had been sent to customers on a sale-or-return basis;
(b)
The customers to whom the cigarettes had been shipped had not sold a
significant percentage of the cigarettes they received;
(c)
The customers had notified Smokin’ of the poor sales and their intent to
exercise their right of return;
(d)
Defendant Wilson knew that approximately one-third of the shipped
cigarettes had not been sold and would be returned;
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(e)
The company continued to ship cigarettes on a sale-or-return basis to
customers and record such shipments as sales even after returns of cigarettes had begun.
Family Medical Leave Act Claims
17.
During 1995, at least fifteen employees filed formal complaints with the
Company’s Human Resources department alleging that they had suffered retaliation as a result of
taking leave under the Family Medical Leave Act of 1993 (“FMLA”). Specifically, the
employees alleged that they had either been demoted or not received promised promotions
shortly after returning from FMLA leave.
18.
Defendant Winston directed the Company’s outside counsel to investigate these
claims and, no later than January 1996, received a report that concluded that the conduct likely
amounted to a violation of the FMLA which expressly prohibits using “the taking of FMLA
leave as a negative factor in employment actions, such as hiring, promotions or disciplinary
actions . . .” 29 C.F.R. 825.220.
19.
The report prepared by outside counsel further concluded that the Company’s
liability for the alleged FMLA violations could be estimated with a reasonable degree of
certainty, likely constituted a liability that was subject to recognition under Generally Accepted
Accounting Principles (“GAAP”) and advised the Company to apprise its outside auditors of the
report’s findings.
20.
Aware that the Company’s reported revenues would be dramatically reduced
when its contingent sales practices were discovered, Defendant Wilson failed to alert the
Company’s outside auditors to the FMLA liability and further failed to disclose the liability in
any of the Company’s financial statements.
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THE TRUTH REVEALED
21.
On June 3, 1996, the Wall Street Journal revealed that the FSC had commenced
an informal investigation into the Company. Citing unnamed sources, the article stated that the
investigation concerned contingent sales of cigarettes. The article also revealed that numerous
employees had notified the Company of their intent to sue to the Company for FMLA violations
during 1995.
22.
On June 27, 1996, the Company issued a press release announcing that it would
likely be forced to restate quarterly and annual results for 1995, and for the first six months of
1996. The Company admitted that the restatement was necessitated by improperly recorded
sales and that such sales were likely to have materially increased the Company’s reported
revenues for 1995 and the first six months of 1996. The press release also disclosed the FMLA
complaints and announced that it was creating a reserve to $50 million to pay such claims if it
were found to have violated the FMLA.
23.
Following this announcement, the price of the Company’s stock dropped
dramatically on exceptionally heavy trading volume, closing at $73, down $23 from the June 26,
1996 closing pricing of $96.
24.
As a result of defendants’ false and misleading statements as detailed above, the
financial results of Smokin’ were artificially and materially inflated during the Class Period.
Defendants’ illegal activities had the intended effect of boosting the Company’s financial results
for the year 1995, and the first six months of 1996, and maintaining Smokin’ stock at artificially
inflated levels during the Class Period. As the truth was revealed, the artificial inflation came
out of the Company’s stock price and the stock price plummeted. As a result of their purchases
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of the Company’s securities during the Class Period, plaintiff and other members of the Class
suffered damages.
PLAINTIFF’S CLASS ACTION ALLEGATIONS
25.
Plaintiff brings this action as a class action pursuant to Federal Rules of Civil
Procedure 23(a) and 23(b)(3) on behalf of herself and all persons and entities other than
defendants who purchased or otherwise acquired the securities of Smokin’ between January 1,
1995, and June 27, 1996, inclusive (the “Class”). Excluded from the Class are defendants herein,
members of the immediate family of each of the defendants, any person, firm, trust, corporation,
officer, director or other individual or entity in which any defendant has a controlling interest or
which is related to or affiliated with any of the defendants, and the legal representatives, agents,
affiliates, heirs, successors-in-interest or assigns of any such excluded party.
26.
The members of the Class are so numerous that joinder of all members is
impracticable. As of June 27, 1996, Smokin’ had more than 500 million shares outstanding. The
precise number of Class members is unknown to plaintiff at this time but is believed to be in the
thousands. In addition, the names and addresses of the Class members can be ascertained from
the books and records of Smokin’. Notice can be provided to such record owners by a
combination of published notice and first-class mail, using techniques and a form of notice
similar to those customarily used in class actions arising under the federal securities laws.
27.
The members of the Class are located in geographically diverse areas and are so
numerous that joinder of all members is impractical. While the exact number of Class members
is unknown to the plaintiff at this time, and can only be ascertained through appropriate
discovery, plaintiff believes there are, thousands of members of the Class, at a minimum.
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28.
Common questions of law and fact exist as to all members of the Class and
predominate over any questions affecting solely individual members of the Class. Among the
questions of law and fact common to the Class are:
(a)
Whether defendants engaged in acts or conduct in violation of the
securities laws as alleged herein;
(b)
Whether defendants had a duty to disclose certain information;
(c)
Whether defendants knowingly or recklessly made materially false and
misleading statements or failed to correct such statements upon learning that they were
materially false and misleading during the Class Period;
(d)
Whether the market price of the Company’s securities during the Class
Period was artificially inflated because of defendants’ conduct complained of herein; and
(e)
Whether members of the Class have sustained damages and, if so, the
proper measure of damages.
29.
Plaintiff’s claims are typical of the claims of the members of the Class because
plaintiff and members of the Class sustained damages arising out of defendants’ wrongful
conduct in violation of federal law as complained of herein.
30.
Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
Plaintiff has no interests antagonistic to or in conflict with those of the Class.
31.
A class action is superior to other available methods for the fair and efficient
adjudication of this controversy since joinder of all members of the Class is impractical.
Furthermore, because the damages suffered by individual Class members may be relatively
small, the expense and burden of individual litigation make it impossible for the Class members
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individually to redress the wrongs done to them. There will be no difficulty in the management
of this action as a class action.
Fraud on the Market Presumption
32.
Plaintiff will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
(a)
Defendants made public misrepresentations or failed to disclose material
facts regarding the Company’s financial situation during the Class Period;
(b)
the omissions and misrepresentations were material;
(c)
the securities of the Company were actively traded at all relevant times on
the NSSE, an efficient and open market;
(d)
the misrepresentations and omissions alleged would tend to induce a
reasonable investor to misjudge the value of the Company’s securities; and
(e)
Plaintiff and the members of the Class, without knowledge of the
misrepresented facts, purchased their Smokin’ securities between the time defendants failed to
disclose and/or misrepresented material facts and the time the truth was disclosed.
33.
Smokin’ trades on the NSSE. The price of the Company’s stock reflects the
effect of news disseminated in the market.
34.
Based upon the foregoing, plaintiff and the members of the Class are entitled to a
presumption of reliance upon the integrity of the market
The Safe Harbor Provision is Inapplicable
35.
The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
The statements alleged to be false and misleading herein all relate to then-existing facts and
conditions. In addition, to the extent certain of the statements alleged to be false may be
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characterized as forward-looking, they were not adequately identified as “forward-looking
statements” when made, and there were no meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from those in the purportedly
forward-looking statements. Alternatively, to the extent that the statutory safe harbor is intended
to apply to any forward-looking statements pleaded herein, defendants are liable for those false
forward-looking statements because at the time each of those forward-looking statements was
made, the defendants had actual knowledge that the particular forward-looking statement was
materially false or misleading.
FIRST CLAIM FOR RELIEF
For Violations of Sections 10(b) and Rule 10b-5 Thereunder
36.
Plaintiff incorporates by reference and realleges each of the foregoing paragraphs.
37.
During the Class Period, defendants carried out a plan, scheme and course of
conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing
public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and
other members of the Class to purchase Smokin’ securities at artificially inflated prices. In
furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them,
took the actions set forth herein.
38.
Defendants (a) employed devices, schemes, and artifices to defraud; (b) made
untrue statements of material fact and/or omitted to state material facts necessary to make the
statements not misleading; and (c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit upon the purchasers of the Company’s securities in an effort to
maintain artificially high market prices for Smokin’ securities in violation of Section 10(b) of the
Exchange Act and Rule 10b-5. Defendants are sued either as primary participants in the
wrongful and illegal conduct charged herein or as controlling persons as alleged below.
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39.
Defendants directly and indirectly, by the use, means or instrumentalities of
interstate commerce and/or of the mails, engaged and participated in a course of conduct to
conceal adverse material information about the business, operations and future prospects of
Smokin’ as specified herein.
40.
Defendants employed devices, schemes, and artifices to defraud, while in
possession of material adverse non-public information and engaged in acts, practices, and a
course of conduct as alleged herein in an effort to assure investors of the Company’s value and
performance and continued substantial growth, which included the making of, or the
participation in the making of, untrue statements of material facts and omitting to state material
facts necessary in order to make the statements made about the Company and its business
operations and future prospects in the light of the circumstances under which they were made,
not misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of Smokin’
securities during the Class Period.
41.
Defendant Winston’s primary liability, and controlling person liability, arises
from the following facts: (i) Defendant Winston was a high-level executive at the Company
during the Class Period and a member of the Company’s management team; (ii) by virtue of his
responsibilities and activities as a senior officer of the Company, he was privy to and participated
in the creation, development and reporting of the Company’s internal budgets, plans, projections
and/or reports; (iii) he enjoyed significant personal contact and familiarity with other members of
the Company’s management team, internal reports and other data and information about the
Company’s finances, operations, and sales at all relevant times; and (iv) he was aware of the
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Company’s dissemination of information to the investing public which he knew or recklessly
disregarded was materially false and misleading.
42.
The defendants had actual knowledge of the misrepresentations and omissions of
material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
ascertain and to disclose such facts, even though such facts were available to them. Such
defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and
for the purpose and effect of concealing the Company’s operating condition and future business
prospects from the investing public and supporting the artificially inflated price of its securities.
As demonstrated by defendants’ misstatements of the Company’s business, operations and
earnings throughout the Class Period, defendants, if they did not have actual knowledge of the
misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by
deliberately refraining from taking those steps necessary to discover whether those statements
were false or misleading.
43.
As a result of the dissemination of the materially false and misleading information
and failure to disclose material facts, as set forth above, the market price of Smokin’ securities
was artificially inflated during the Class Period. In ignorance of the fact that market prices of the
Company’s publicly traded securities were artificially inflated, and relying directly or indirectly
on the false and misleading statements made by defendants, or upon the integrity of the market in
which the securities trades, and/or on the absence of material adverse information that was
known to or recklessly disregarded by defendants but not disclosed in public statements by
defendants during the Class Period, Plaintiff and the other members of the Class acquired
Smokin’ securities during the Class Period at artificially high prices and were damaged thereby.
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44.
At the time of said misrepresentations and omissions, Plaintiff and other members
of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the
other members of the Class and the marketplace known the truth regarding the Company’s
activities, which was not disclosed by defendants, Plaintiff and other members of the Class
would not have purchased or otherwise acquired their Smokin’ securities, or, if they had acquired
such securities during the Class Period, they would not have done so at the artificially inflated
prices which they paid.
45.
By virtue of the foregoing, defendants have violated Section 10(b) of the
Exchange Act, and Rule l0b-5 promulgated thereunder.
46.
As a direct and proximate result of defendants’ wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company’s securities during the Class Period.
SECOND CLAIM FOR RELIEF
Violation Of Section 20(a) Of
The Exchange Act Against Defendant Jones
47.
Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
48.
Defendant Winston acted as a controlling person of Smokin’ within the meaning
of Section 20(a) of the Exchange Act as alleged herein. By virtue of his high-level position, and
his participation in and/or awareness of the Company’s operations and/or intimate knowledge of
the financial condition of the Company, Defendant Winston had the power to influence and
control and did influence and control, directly or indirectly, the decision-making of the
Company, including the content and dissemination of the various statements which Plaintiff
contends are false and misleading.
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49.
As set forth above, Smokin’ violated Section 10(b) and Rule 10b-5 by its acts and
omissions as alleged in this Complaint. By virtue of his positions as controlling person,
Defendant Winston is similarly liable pursuant to Section 20(a) of the Exchange Act. As a direct
and proximate result of defendants’ wrongful conduct, Plaintiff and other members of the Class
suffered damages in connection with their purchases of the Company’s securities during the
Class Period.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
A.
Determining that this action is a proper class action, designating Plaintiff as Lead
Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the Federal Rules of
Civil Procedure and Plaintiffs counsel as Lead Counsel;
B.
Awarding compensatory damages in favor of Plaintiff and the other Class
members against all defendants, jointly and severally, for all damages sustained as a result of
defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;
C.
Awarding Plaintiff and the Class their reasonable costs and expenses incurred in
this action, including counsel fees and expert fees; and
D.
Such other and further relief as the Court may deem just and proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: July 1, 2008
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PLAINTIFF’S REQUESTS FOR PRODUCTION OF DOCUMENTS
Pursuant to Rule 34 of the Federal Rules of Civil Procedure, Plaintiff Jenny Jessen requests that
Smokin’ Cigarettes, Inc. and Jesse Winston (collectively, “Defendants”) produce all responsive
documents requested herein at the office of undersigned counsel as soon as practicable.
INSTRUCTIONS
1. These requests require the production of all responsive documents within the sole or joint
possession, custody or control of the Defendants, including their agents, departments,
attorneys, directors, officers, employees, consultants, investigators, insurance companies,
or other persons subject to Defendants’ custody or control.
2. All documents that respond, in whole or in part, to any portion of these Requests must be
produced in their entirety, including all attachments and enclosures.
3. For purposes of these requests, the words used are considered to have, and should be
understood to have, their ordinary, everyday meanings. Plaintiffs refer Defendants to any
dictionary in the event Defendants asserts that the wording of a request is vague,
ambiguous, unintelligible, or confusing.
DEFINITIONS
4. The words “and,” “or,” “each,” “any,” “all,” “refer,” and “discuss,” shall be construed in
their broadest form and the singular shall include the plural and the plural shall include
the singular whenever necessary so as to bring within the scope of these Requests all
documents (defined below) that might otherwise be construed to be outside their scope.
5. The phrase “advertising, marketing or promotion” of cigarettes includes public relations
activities involving smoking and health.
6. For present purposes, the term “defendants” includes Smokin’ Cigarettes Inc. as well as
those companies whose records are found in the Tobacco Master Settlement Agreement
database.
7. Solely for the purpose of the TREC 2008 legal track, “document” means all textsearchable data, information or writings stored in the Tobacco Master Settlement
Agreement database, including without limitation: any written, electronic or
computerized files, data or software; memoranda; emails; correspondence; OCR scanned
images; communications; reports; summaries; studies; analyses; evaluations; notes or
notebooks; indices; spreadsheets; logs; books; pamphlets; binders; calendar or diary
entries; ledger entries; press clippings; graphs; tables; charts; printouts; drawings; maps;
meeting minutes; transcripts. The term “document” encompasses all metadata associated
with the document. The term also includes all drafts associated with any particular
document.
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8. “Person” or “individual” means natural persons, corporations, firms, partnerships,
unincorporated associations, trusts, and any other legal entity.
9. The term “plans” means tentative and preliminary proposals, recommendations, or
considerations, whether or not finalized or authorized, as well as those that have been
adopted.
10. The term “relating to” means in whole or in part constituting, containing, concerning,
discussing, describing, analyzing, identifying or stating.
FIRST SET OF REQUESTS FOR PRODUCTION:
Plaintiffs request that Defendants produce all responsive documents on the following topics:
1. [TOPIC 142] All documents discussing or referencing accounting rules governing the
recording of contingent sales.
2. [TOPIC 143] All documents in which a tobacco company official (including but not
limited to the CEO (Chief Executive Officer)) is quoted as expressly referencing
contingent sales.
3. [reserved]
4. [TOPIC 145] All documents concerning actual or projected sales.
5. [TOPIC 146] All documents concerning actual and projected cigarette shipments.
6. [TOPIC 147] All documents concerning customer returns of cigarettes.
7. [TOPIC 148] All documents concerning the Company’s FMLA policies, practices and
procedures.
8. [TOPIC 149] All documents concerning complaints by employees of retaliation
following the taking of leave.
9. [TOPIC 150] All documents concerning the Company’s liability for the alleged
violation of the FMLA.
10. [TOPIC 151] All documents concerning the Company’s revenue recognition policies or
accounting policies, practices and procedures for the recognition of liability with respect to
potential or filed lawsuits.
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